IBM's Brazil Expansion Continues - Analyst Blog

By: Zacks.com

Posted: 10/11/2012 11:30:00 AM

Referenced Stocks: AMZN;GOOG;IBM;MSFT

Consistent with its expansion policy in growth markets, tech
giant
International Business Machines Corp. (IBM)
recently announced that it has opened three new branches in Brazil.
The three new offices, located in the cities of Joinville, Natal
and Sao Luis, take the number of IBM branches in Brazil to 30.

The opening of the new branches come at a very opportune moment
as Brazil gets ready to host the FIFA World Cup in 2014 and the
summer Olympics in 2016. IT spending is expected to increase
manifold over the next couple of years as the government continues
to invest in overhauling telecommunications and IT infrastructure
through programs such as the National Broadband Plan, "the Plano
Nacional de Banda Larga".

We believe that the two major events provide significant growth
opportunity for IBM, particularly due to its significant presence
in the region. Apart from the three new branches, the company is
also expanding its office in the city of Salvador, which along with
the cities of Sao Luis and Natal have been the strongest performing
regions in the recent times.

Brazil is a major growth market for IBM. The company expects the
growth markets to contribute 30.0% of its total geographic revenue
by 2015, up from 21.0% in 2010. Brazil is an important member of
the BRICS (Brazil, Russia, India, China and South Africa) group,
which contributed approximately 19.0% of IBM's revenue in 2011. The
country is expected to grow much faster than most of IBM's major
markets over the next few years. The country's growth prospect is
driven by increasing demand for IT services from different
verticals such as banking, telecommunications as well as oil &
gas.

IBM has been aggressively expanding into Brazil over the last
few years. Although, IBM has a global research lab in Sao Paulo and
Rio de Janeiro and has significant presence in these fast growing
urban regions, the three new branches reflect the company's focus
on increasing its reach in the untapped regions of Brazil.

As a part of its efforts IBM invested approximately $22.85
million to launch its first corporate public cloud in the country.
In April this year, IBM signed a strategic agreement with
Brazil-based EBX Group to acquire 20% of SIX Automacao. Besides
setting up a research & development (R&D) center in
collaboration with SIX Automacao, IBM also agreed to manage EBX's
IT operations, which will add approximately $1 billion to the
company's cash coffers over the next 10 years.

Our Take

Although we remain optimistic on IBM's policy of expanding its
business in Brazil, we remain concerned about the increasing
government regulation for U.S.-based companies going forward. IBM,
along with other U.S.-based companies, faces tax related issues in
Brazil, which may become an impediment for growth in this region
going forward.

However, as growth and investment opportunities in the developed
countries slow down in 2012 and beyond (the visibility is
considerably murkier), we believe that emerging economies of
Africa, Latin America and the Asia-Pacific will play a key role for
IBM.

We also believe that IBM's continued focus on global expansion
will provide it a significant competitive edge over its rivals
including U.S. companies such as
Amazon Inc. (AMZN)
,
Microsoft Corp. (MSFT)
and
Google Inc. (GOOG)
as well as smaller local companies operating in any given
region.

We have a long-term Neutral recommendation on the stock.
Currently, IBM retains a Zacks #3 Rank, which implies a short-term
Hold rating.